In this report, we analyze today’s Senate Banking hearing on the housing finance system which showcased the growing bipartisan consensus on the need for Fannie and Freddie to exit conservatorship. A bipartisan consensus for legislative action was not clearly evident, but the seriousness of the session, its participation rate on both sides of the aisle, and the clear indication of GOP determination to craft a bill confirm our forecast that GSE reform will be a top Senate priority in this session. In dispute, however, was the risk of the enterprises’ diminishing capital buffers with Republicans such as Chairman Crapo (R-ID) and Sen. Corker (R-TN) insisting to FHFA Director Watt that, in the event of a quarterly loss, the GSEs could draw on credit available to them through an existing agreement with Treasury. Director Watt argued that any such move could threaten market confidence, saying he will do all in his power to prevent a Treasury draw.
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